This Can't End Well: American Households Borrowing at Fastest Clip Since 2009 Lombardi Letter 2017-08-18 04:04:14 american household mortgage debt federal reserve recession stock market crash bank of new york U.S. households American household borrowing is at current expansion highs. Adding more debt can't end well as the economy can only go in one direction from here—down. 2017,News,U.S. Economy

This Can’t End Well: American Households Borrowing at Fastest Clip Since 2009

U.S. Economy - By Benjamin A. Smith |
american household

American Household Borrowing at Record Business Expansion Levels, Right at the Cycle Peak

Never underestimate the ability of the populace to top-tick the market. American household borrowing is at current expansion highs, right as the business cycle peaks. Packing on large, additional debt can’t end well as the economy has only one possible direction to go from here—down.

The Federal Reserve Bank of New York is reporting that consumer debt levels rose 4.5% to $12.84 trillion through June 2017. Credit card debt rose 7.5% in two quarters! Mortgage debt rose 3.9%. Auto and student debt also increased, but at slower rates. (Source: “U.S. Households Borrow at Fastest Pace of Expansion, Fed Says,” Bloomberg Markets, August 15, 2017.)


Meanwhile, how long can the debt binge continue before debt servicing becomes an issue? In some ways, it already is.

Also ReadU.S. Mortgage Rates to Increase in 2017 – So Are the Risks of Another Housing Crisis

The number of 30-day delinquencies in four debt categories all increased. Credit cards saw the largest increase, up to 6.2% from 5.1% a year earlier. The reason? Credit standards are loosening once again. “This is occurring within the context of loosening lending standards, as borrowers with lower credit scores recover their ability to access credit cards,” said a New York Fed senior vice president, Andrew Haughwout, in a press release. (Source: Ibid.)

So here we go again, having learned nothing over the past decade. It was only 10 years ago that consumers were taking on record amounts of mortgage debt right when housing prices were cresting. Home owners were either too ignorant or disregarded how badly adjustable rates mortgages would hamper their future ability to pay. Since credit card rates are typically much higher than mortgages, consumers are playing with fire. When the inevitable recession comes, debt loads will be at their highest. That’s a bad combination.

Average Credit Card Interest Rates (APR) – 2017

Card Type Low High Overall
Travel Rewards Cards 15.62% 19.24% 15.99%
Airline 14.62% 21.99% 16.24%
Hotel 15.24% 21.99% 16.12%
Business Credit Cards 13.12% 19.87% 15.37%
Cash Back Credit Cards 13.24% 22.99% 20.90%
Student Credit Cards 13.99% 22.62% 19.80%

(Source: “Average Credit Card Interest Rates (APR) – 2017,” ValuePenguin, last accessed August 17, 2017.)

Rising delinquencies are often an early indicator of financial stress. In turn, rising delinquencies can presage recession. Much like the proverbial canary in the coalmine, it’s correlated strongly with household balance sheet strength. The Federal Reserve monitors this number vigorously, as it’s a direct factor in the course of fiscal policy. The last thing the Fed wants is to raise rates too quickly into an imperiled consumer. Other factors come into play, of course. But a debt-embattled consumer’s ability to take on more debt is a high priority. It’s one of the leading factors that can trigger a recession.

As we’ve said time and again on Lombardi Letter, recession equals stock market crash. There’s no two-ways about it. Historic valuations cannot support the crashing earnings environment a recession brings about.

Rising delinquencies are just the tip of the spear. It they continue—with 70% of the gross domestic product reliant on consumer spending—the economy could get impaled on it.

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